Report: Positive outlook for big pharma in 2017

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Dive Brief:

Poor near-term growth, pressure on foreign exchange rates from a strengthening U.S. dollar and political overhang are just a few of the things Jefferies analyst Jeffrey Holford thinks could weaken the pharma sector in 2017.

Even so, the analyst still anticipates plenty of R&D catalysts in the coming year and highlighted the potential for strong M&A in a December report.

Holford rates AbbVie and Eli Lilly as the top picks for U.S. pharma, and AstraZeneca and Novartis as the top stock picks from Europe. On the flip side, he sees Pfizer, Johnson & Johnson, Merck & Co, Novo Nordisk and Sanofi as the least preferred stocks.

Dive Insight:

After a slow 2016 that saw few deals, lower IPO activity and several major R&D blow ups — never mind an unexpected outcome in the presidential election — Holford expects a more eventful 2017. "U.S. tax reform as well as repatriation of cash in 2017 could lead to a record year for acquisitions by Large Cap Pharma."

"We continue to watch for further government pricing action as we still believe that there is an outside chance of dual eligible rebate reform being brought back into the spotlight, which would be devastating for certain Large Cap Pharma companies," he wrote in a Dec. 19 note.

Holford estimates big pharmas have about $123 billion in cash, with approximately $102 billion overseas. A Trump administration could mean major tax reforms that allow companies to bring that cash back home at a discounted tax rate — potentially driving M&A. (Although previous tax holidays did not have that effect. Read more here.)

Merck, J&J and Pfizer stand to benefit the most from any repatriation holiday, the analyst said.

Most of the companies in the space have signaled further interest in dealmaking, particularly bolt-on acquisitions that could fill pipeline gaps or offset top-earning drugs losing patent protection.

Oncology, immunology, cardiovascular & metabolic and neurology are areas attracting interest at the moment, while spaces like infectious disease, ophthalmology and vaccines have generated less buzz.

Holford sees several pivotal events in the first half, including a decision on patents for AbbVie's Humira (adalimumab), cardiovascular outcomes data for Merck's anacetrapib and the filing of the Opdivo/Yervoy combination from Bristol-Myers Squibb.